F. Explain (in as much detail that you wish including nuF. Explain (in as much detail...

F. Explain (in as much detail that you wish including nuF. Explain (in as much detail that you wish including numerical analysis and graphs) the operating income view or the neo-classical approach in regards to the relationship between the WACC and the value of the firm.

merical analysis and graphs) the operating income view or the neo-classical approach in regards to the relationship between the WACC and the value of the firm.

Solutions

Expert Solution

WACC Or Weighted Average cost of capita is the required rate of return that the firm expects when it raise the fund from shareholders and the debt holders. It is basically a discount rate to calculate the value of the firm.

To calculate the WACC, multiply the cost of exch capital component by its proportional weight and take the sum of the result.

WACC = E/V* Re + D/V*Rd*(1- tax)

Re = cost of equity

Rd= cost of debt

E = market value of firm's equity

D = market value of firm's debt

tax = corporate tax

The value of firm is the present value of all future cash flow. It is calculated by discounting the cash flow with WACC. It is also called the intrinsic enterprise value of the firm.

The formula to calculate the value of the firm = (EBIT *(1-TAX) + DEPRECIATION -CAPITAL EXPENDITURE - WORKING CAPITAL CHANGE) / WACC

EBIT

EBIT(1-TAX)

DEPRECIATION

CAPITAL EXPENDITURE

WORKING CAPITAL CHANGE

CASH FLOW TO FIRM

WACC

VALUE OF THE FIRM

jeff jeffy answered 1 year ago

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